Record-low mortgage rates are delivering more refinancing demand than some lenders can handle.
Homeowners are rushing to refinance their mortgages thanks to big falls in interest rates prompted by fears of the spreading coronavirus. Some lenders are having trouble keeping up with the red-hot demand.
Weekly refinancing applications recently hit their highest level in nearly 11 years, according to the Mortgage Bankers Association. The average rate on a 30-year fixed-rate mortgage, the most popular home loan in the U.S., is close to its lowest level in nearly 50 years of record-keeping, hitting 3.36% last week.
Falling rates are generally considered good news for the mortgage market. But the current jump in refinancing demand presents a dilemma for some lenders, which must balance their desire for volume with their capacity to process applications.
Lenders are wary of expanding too quickly in the boom-and-bust mortgage market. What’s more, the coronavirus pandemic—though it helped send mortgage rates down—could hobble home sales during the important spring selling season. Some would-be sellers are already reluctant to stage open houses, and potential buyers could shy away because they are unsure about their jobs.
Lenders Make Adjustments to Meet Demand
Still, many lenders are doing everything they can to increase their ability to take advantage of the current refinancing boom, however long it may last. That includes outsourcing work to other countries and boosting pay for some employees, said Jeff Taylor, managing partner of Digital Risk, a technology and risk firm that consults with mortgage lenders. Underwriters with five years of experience are being offered compensation packages worth $130,000, up from about $80,000 in nonpeak times, Taylor said.
Gordon Miller, president of Miller Lending Group LLC in Cary, N.C., said his firm had to update its website, telling visitors looking for a refinancing quote that someone would get back to them in 48 to 72 hours rather than right away. Mr. Miller also had to change his voice mail, asking callers to leave a number where they could be reached in the evening.
“There is nothing like this that I have ever experienced,” Miller said.
Truist Financial Corp., the sixth-largest U.S. retail bank, said it has seen a major influx in both purchase and refinancing applications. “The industry does not have the capacity to handle it,” Chief Executive Kelly King said at an industry conference last week. “Everybody is trying to staff up.”
Lenders use the 10-year Treasury yield as a guide for setting mortgage rates, and that has been hitting record lows as investors worried about the impact of the coronavirus pile into safe-haven government bonds.
But mortgage rates don’t move in lockstep with Treasury yields.
Reluctance to Reduce Rates
When demand is strong, lenders can be reluctant to lower prices and crimp their profits, especially if their competitors don’t. It is akin to gas stations that lower their rates just enough to stay competitive with rivals.
Some lenders are keeping rates relatively high, a sign that borrowers’ strong appetite for refinancings is outpacing the industry’s ability to make them. The spread between the 10-year Treasury yield and the 30-year fixed mortgage rate is near its largest since 2009. Bank of America Corp. and JPMorgan Chase & Co. both advertised rates of 4.375% in some markets last week.
Lenders often sell the mortgages they expect to make to investors, which can create more roadblocks to lowering rates. When borrowers take out a mortgage, they can often get a “rate lock” where the lender guarantees a certain rate if they close the loan within a set period, no matter what happens to rates in the open market.
But when rates fall as quickly as they have, borrowers often try to renegotiate the rate they locked in, said David Battany, executive vice president for capital markets at Guild Mortgage in San Diego. That could create a disconnect between what the lender offered to the borrower and what it offered to the investor, and has made some lenders hesitant to lower their rates.
Banks Pulling Back
Battany said his firm is focused on making sure purchase loans close on time because there is more at stake. “We, like all of the lenders in the market, have not lowered our interest rates as much to make sure we have enough capacity to close the loans on time,” Battany said.
Bob Carr, senior vice president of residential lending at Draper and Kramer Mortgage Corp. in Downers Grove, Ill., said it has been more difficult to pair borrowers and lenders. “A lot of banks have pulled back, saying ‘We’re full,’” he said.
Some borrowers are finding they can’t get a refinancing if they wait even a couple of days. Ken Slusser, who works in the technology industry in North Carolina, called his mortgage lender after hearing about the Federal Reserve’s first emergency rate cut early this month. He thought he could get a better deal than the 4% rate he got last fall.
His lender told him he might be able to get a 3.5% mortgage. But after Slusser submitted his application a couple of days later, the lender said it could only lower his rate to 3.875%. That wasn’t attractive enough, so Slusser is waiting to see if mortgage rates fall more.